SINGAPORE, March 1 (Reuters) - Hong Kong Exchanges &
Clearing Ltd is likely to launch monthly metals
contracts as part of a plan to boost business with mainland
China and justify its $2.2 billion purchase of the London Metal
Exchange, senior metals industry executives and traders said on
Friday.

HKEx this week unveiled a preliminary timeline of
developments for the LME as it posted results that showed
shrinking profits and a core loss for the exchange it acquired
in December last year.

HKEx also said it planned to launch a suite of commodity
contracts for the Asian time zone backed by a new clearing house
as soon as next year. It also flagged further developments in
its Asian reference price, which traders said could act as a
backbone for new contracts.

HKEx is likely to start with metals contracts that could
prove a template for expansion into ferrous metals, such as iron
ore and coking coal, industry executives say.

"Monthly contracts are probably seen as a big advantage
because you could potentially beef up volume with Asian daytime
liquidity," said Jeremy Goldwyn, a director in charge of broker
Sucden's business development in Asia.

"It's a single-date system so therefore you can trade that
electronically much more easily. People would probably be happy
to put in a bit more liquidity which at the moment doesn't
exist."

When asked about monthly contracts, the LME said it was
looking at a range of options for Asia, but had no specific
plans yet.

Monthly contracts could unlock liquidity that has so far
been conspicuously absent from the LME's Asia time zone.

The LME's complex prompt date system is designed to let
users hedge every day out to three months, spreading liquidity
across that timeframe. A monthly contract would concentrate
volumes on a single day a month, which could attract more
investors.

ASIAN BENCHMARK

The success of its future contracts may hinge on the
development of the LME's Asian reference price, which will be
aligned with the Shanghai Futures Exchange close from June 3.

"It's a question of whether or not the Asian benchmark can
migrate into being the reference price for physical
transactions," said Mike Frawley, global head of base metals and
listed products for brokerage Jefferies Bache in New York.

"There is every possibility it will, but it will take time."

Because it is just a reference price, the LME's current
Asian benchmark is widely ignored by traders, who would prefer a
tradeable contract. Industry executives expect the LME to make
the reference price tradeable down the line.

Many traders also say the benchmark does not really
represent the Asian market, because it is backed by a contract
that is deliverable anywhere within the LME's global network of
warehouses, which span from Vlissingen to Detroit.

A lack of liquidity is also undermining the Asian benchmark,
said Leong Chean Wai, a managing director at the commodity
derivatives and treasury markets division of Singapore's DBS
bank.

"You want more liquidity, you need to have more members,"
she said. "The HKEx needs to change its membership structure."

"When we first started up we looked at getting LME
membership, but you have to have physical operations in London,
so you can be registered and audited by the FSA," Leong added.

For its LME business, the HKEx has further ambitions: it
plans to introduce RMB clearing services, extend its warehouse
network into the Chinese mainland next year and explore tie-ups
with Chinese commodity exchanges.

This is a departure from the LME's traditional way of doing
business: some of its newest contacts, such steel and LME minis,
have proven unpopular and metals industry executives and
investors say this is partly because the LME did not listen to
the market when it was developing the products.

"HKEx are undertaking considerable effort to sample the
market to establish exactly what user expectations are," said
Jefferies Bache's Frawley.

Many traders wonder how HKEx will execute its strategy to
boost profits at the LME, and HKEx officials have been coy about
their exact plans. But some executives and traders are still
willing to give the HKEx the benefit of the doubt.

"It's an ever-moving target and maybe the HKEx have a lot
more up their sleeve than perhaps people think," said Sucden's
Goldwyn.
(Editing by Miral Fahmy)